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Canada bonds end up after reversing early losses

TORONTO: Canadian government bonds ended up on Tuesday after reversing their early losses and following US Treasuries higher when that market was bolstered by the announcement of another buyback at the long end of the yield curve.

The US Treasury department announced on Tuesday that it will be repurchasing up to $1 billion of Treasury bonds on Thursday.

"Much of the move came at the long end, and it was associated with the debt buyback announcement," said Mark Chandler, senior economist at Goldman Sachs Canada.

The Canadian benchmark long bond, due 2027, gained 40 Canadian cents to C$129.78 to yield 5.808 percent.

In the US, the 30-year T-bond gained 1-1/32 to yield 6.094 percent. The negative yield spread between the two long bonds was at 28.6, from 33.8 at the previous session's close.

The Canadian market failed to capture the full benefit of the improved tone in the US, and lagged behind the Treasuries market through most segments of the curve.

US and Canadian bonds slipped lower as North American trading began. News at 8:30 a.m. (1330 GMT) that US retail sales increased by 1.1 percent in February accentuated the pressures on both markets by reinforcing concerns about the extent of interest rate tightening from the US Federal Reserve in coming months, market watchers said.

The US market subsequently recovered after news that the US Treasury announced it will buy back up to $1 billion of 30-year debt on Thursday, and the Canadian market gradually picked up on the more positive tone.

Continued tumult in North American stock markets has also been a positive for fixed-income markets in recent sessions, market watchers said, as declining stock values sent safe haven flows into bonds.

The Toronto Stock Exchange Composite 300 Index moved higher in early trading, but surrendered those gains as the session progressed. It was down 47.77 points to 9413.8 toward the end of trading on Tuesday.

"Just in the last couple of days, the fragility in stocks has also been behind the positive sentiment in bonds," Chandler said.

Trading in Canadian bonds was fairly subdued, with CanPx reporting only C$328 million of trading in eight benchmark bonds late in the session.

"We're just waiting for direction ahead of any new numbers," Chandler said.

Statistics Canada will release the consumer price index for February at 7:00 a.m. (1200 GMT) on Wednesday. A consensus forecast prepared by Reuters points to a year-over-year increase of 2.4 percent in the all-items CPI, with a 1.5 percent increase in the closely watched core index.

Also on Wednesday, the government of Canada will auction of C$2.6 billion of 10-year Government of Canada bonds.

The Canadian short end underperformed the long end on Tuesday, pushing the negative yield spread between two-year and 30-year bonds to 15.5 basis points from 14.4 at the previous session's close.

Canada's two-year bond gained 3 Canadian cents to C$98.85, for a yield of 5.961 percent.

In money markets, the three-month when-issued T-bill yielded 5.23, up from a yield of 5.16 percent at the previous session's close.

An auction of C$2.75 billion of 21-day cash management bills on Tuesday netted an average yield of 5.083 percent. An auction of C$4.2 billion of three-month Treasury bills resulted in an average yield of 5.16 per cent, with C$1.8 billion of six-month bills netting an average yield of 5.642 percent and C$1.8 billion one-year bills netting an average yield of 5.870 percent. -Reuters